Can I have more than one ISA?

In April 2017 the ISA limit, the amount you can save or invest annually, tax-free in ISAs, rose to £20,000.

There are five main types of ISAs, and the good news is that your choices are flexible.

What are the main ISA rules?

As long as your total tax-free savings in 2017/18 are no more than £20,000, you can split them across a combination of cash ISA, investment ISA, or innovative finance ISA savings. However, they would have to be different types of accounts, meaning for example you can’t invest in two cash ISAs in the same tax year. So you can definitely have more than one ISA per year - they just have to be different types of ISAs.

How much can you earn tax-free with an ISA?

According to the Money Charity in April 2017, if someone on the average salary saved 3.3% of their income in an average instant access savings account for a year, they would receive 70p in interest after tax. If they saved it in an average cash ISA, they would receive £3.58.

What are the different types of ISAs?

Cash ISA

Quick definition: It’s just like a savings account, but you don’t get taxed.

The pluses and the minuses:

A fixed rate Cash ISA can pay a guaranteed amount of interest over a fixed period of time - you know what you are getting.

On the positive side, many fixed rate Cash ISAs are easy access accounts if you need funds at short notice, and they are all protected by the Financial Services Compensation Scheme (FSCS) up to £85,000.

Many will have attractive introductory rates that revert to low standard rates after a year.

Are they better value than a bank account? Since the Personal Savings Allowance (PSA) was introduced in 2016, basic rate (20%) taxpayers can earn up to £1000 interest a year tax-free while higher rate (40%) taxpayers can earn up to £500 interest a year tax-free on regular savings accounts. Interest from ISAs don’t count towards your PSA, so a rise in interest rates could give you a lot more interest than a simple bank savings account.

Help To Buy ISA

In short: Cash ISAs aimed at helping first time buyers get a foothold onto the property ladder

The pluses and the minuses:

Save up to £1200 in month one, then £200 a month into a Help To Buy ISA, and the Government will boost your savings by 25% up to a maximum of £3000 when you use it to buy your first home. It needs as little as a 5% deposit with an equity loan or a mortgage guarantee.

As it is another form of Cash ISA, if you have an existing Cash ISA you’d usually have to transfer it to the Help To Buy ISA as you can’t have both in one tax year - you can transfer up to £1200.

However, they are on the way out, and by November 2019 you won’t be able to open a Help To Buy ISA. Since April you can transfer the pot into a Lifetime ISA.

Lifetime ISA

In short: To save money to keep aside for home buying or for retirement

The pluses and the minuses:

Announced in April 2017, at £4000 a year the lifetime isa (or ‘Lisa’) has a higher annual maximum contribution that the Help To Buy ISA and gives interest from day one, with a bonus of 25% at the end of the tax year.

You have to be under 40 to open one, and the bonus is paid until the age of 50. So effectively for every £4 you save up to the time you reach 50, the government will give you £1. The maximum bonus is £32,000 - eg: £1000 a year from age 18 to age 50.

Once you reach 60 you can take out as much as you like tax-free. If you need to take money out before age 60, unless it is specifically for buying a first home you would lose the government bonus, the interest on that bonus and would have to pay a 5% fee.

If you can afford to make significant contributions then it could be an alternative to a pension scheme, though not everyone will be able to contribute as much at such a young age.

Investment ISA

Also known as a stocks and shares ISA, this usually involves putting your ISA into the hands of a fund manager or an online service to invest into a variety of different bonds and shares, or tracking the FTSE 100 index.

Capital gains tax - usually 18% (basic) or 28% (higher) - doesn’t apply in 2017/18 to profits over £11,300 coming from shares, while you don’t have to pay tax on interest earned from bonds.

Most providers charge fees and management charges, and may charge other fees too depending on what you want to do with your investment.

This kind of ISA may be more of a long-term investment, as shares do tend go down as well as up and as a short-term investment it could be riskier than a Cash ISA.

Innovative Finance ISA

In short: Peer-to-peer savings in which investors lend money to fund others in business

The pluses and the minuses:

Effectively you become a lender, investing in individuals, property or businesses. With an Innovative Finance ISA (IFISA) interest from lending to others is not taxed, though it is a riskier proposition than a Cash ISA as there can be less of a guarantee you’ll get your money back.